Being Street Smart
Market Seasonality And The Fed Are A Powerful Combination.
November 29, 2013.
The market makes most of its gains each year in its favorable season of
approximately October to May. A separate positive influence is the Federal
Reserve when it's providing easy money and low interest rates in an effort to
revive a flagging economy.
Those individual influences are so consistent they've been memorialized in long
time market maxims 'Sell in May and Go Away' (to come back November 1), and
'Don't Fight the Fed'.
Even in the unusual four straight years of unprecedented Fed QE stimulus, and
record low interest rates, the seasonal factor did not go away (although it has
been less pronounced). The market was at its strongest when the two influences
In the last four favorable winter seasons beginning November 1, 2009 through May
1, 2013, the S&P 500 gains averaged 12.8%.
In the last four unfavorable summer seasons to November 1, 2013, the gains
averaged only 3.1%.
And even though, thanks to the increasing Fed QE stimulus each year, the market
did not have serious corrections in its unfavorable seasons, the S&P 500 was
down 0.1% for the unfavorable season in 2010, and experienced a 16% plunge
within the unfavorable season before recovering. And it lost 7.7% for the
unfavorable season in 2011, and experienced a 20% plunge within the unfavorable
season before recovering.
Meanwhile, its gains in two of the last four unfavorable seasons, were an
unusual gain of 9.3% in the unfavorable season last year, and 10.9% in the
unfavorable season this year, as QE reached $85 billion a month.
We should enjoy the combination of those two positive influences while they
last, but be prepared for what happens next, since it looks like for the first
time in four years both will become negative at about the same time in the
Favorable seasonality each year usually lasts until early May, but not
'Don't fight the Fed', a positive when the Fed is increasing its easy money,
becomes a decided negative when the Fed begins to pull back the punch bowl, and
that could take place between now and March.
The Fed is concerned that it has continued its stimulus for so long it risks
creating dangerous asset bubbles, and needs to begin removing the punch bowl by
tapering it back. Some analysts claim there are already bubble-like conditions
showing up in the likes of investor enthusiasm and valuation levels, and expect
the tapering to begin at the Fed's December FOMC meeting.
But the Fed has also provided assurances it will not taper until the economy is
strong enough to stand on its own feet.
This week's economic reports indicate the anemic recovery has still not reached
the important housing industry, Pending Home Sales
unexpectedly declined in October, for the fifth straight month, falling to the
lowest level in 10 months. (The consensus forecast had been for an increase
of 1.0%). The S&P/Case-Shiller Home
Price Index showed home prices were up only 0.7% in September, the
smallest amount since last February. Permits
for future housing starts were up 6.2% in October. But unfortunately,
that was almost all due to a big 17% increase in permits for apartment
complexes, still in greater demand than single family homes thanks to the anemic
economy. Permits for single family homes, considered to be the important
criteria, were up less than 1%. And the Mortgage Bankers Association reported
mortgage applications have fallen by 7% over the last four
The Dallas Fed's Mfg Index fell
again in November. It was at 12.8 in September; fell to 3.6 in October, and now
to 1.9 in November. (The consensus forecast was for a bounce back to 5.0).
Last but not least, the Conference Board's Consumer Confidence Index, which
unexpectedly plunged from 80.2 in September to 72.4 in October, fell further in
November to 70.4. (The consensus forecast was for an improvement to
If the Fed meant what it said about not tapering until the economic recovery
improves enough to handle it, it will not begin tapering until next February or
So, favorable seasonality ends in April, and the Fed is likely to be reversing
to the negative side of 'Don't fight the Fed' by then.
Let's hope the market doesn't begin anticipating the end of those influences in
advance of them taking place.
But it looks like Wall Street and corporations are preparing for that
When Wall Street and corporations become concerned that a serious market top may
be approaching they try to get as much additional money as possible from
investors while investors are still confidently buying. So there is usually a
sizable increase in the number of initial public offerings (IPO's) of stock in
previously private companies and start-ups, as well as 'secondary' offerings of
additional stock by established public companies.
So far this year there has been $51 billion of new IPO's, the most since $63
billion in the same period in 2000, when that market bubble was beginning to
burst. And there has been $155 billion in secondary offerings, more than near
either the 2000 or 2007 tops.
Still more reasons to be careful and to realize that 2014 is not likely to be
anything like 2013.
Sy is president of
and editor of the free market blog
Street Smart Post.
Follow him on twitter @streetsmartpost. He was the Timer Digest #1 Gold Timer
for 2012 (Gold Timer of the Year), as well as the #2 Long-Term Stock Market